Investment in penny stocks based on ‘buy call’ of experts isn’t a sufficient explanation

Case Details: PCIT v. Swati Bajaj - [2022] 139 taxmann.com 352 (Calcutta)

Judiciary and Counsel Details

• • T.S. Sivagnanam & Hiranmay Bhattacharyya, JJ.
  • Vipul Kundalia, Smarajit Roychowdhury, Aryak Dutta, Tilak Mitra, Om Narayan Rai, Prithu Dhudhoria, Amit Sharma & Soumen Bhattacharya, Advs. for the Appellant.
  • S.M. Surana, Sr. Adv., Saurabh Bagaria, Avra Mazumdar, Subash Agarwal, Pratyush Jhunjhunwala, Varun Kedia, Brijesh Kumar Singh, G.S. Gupta, Bhaskar Sengupta, Binayak Gupta, S.K. Md. Bilwal Hossain, K. Roy & Arif Ali, Advs. for the Respondent.

Facts of the Case

During the assessment, the Assessing Officer (AO) noted that the assessee had shown long-term capital gains and claimed the same as exempt. It was observed that the assessee had purchased shares Company worth Rs. 1,00,000 and soon after the expiry of the period to become eligible for long-term capital gains (LTCG), same were sold for Rs. 29,23,500/-.

Within a short period, the assessee managed to sell the shares with an increased value of about 2823%. AO also noted that the company in which investment was made had no worth and the trade pattern of the shares followed a “bell” shape. Thus, AO held that the assessee had pre-designed investment in shares to convert unaccounted cash under the guise of LTCG. Accordingly, AO invoked section 68 and taxed the receipt from the sale of shares.

The CIT(A) confirmed the order of AO. However, on further appeal, the Tribunal reversed it. Aggrieved revenue filed the instant appeal before the High Court.

High Court Held

The High Court held that the assessee cannot dispute that the shares of the company she had dealt with were insignificant in value before their trading. If such is the situation, it is the assessee who has to establish that the price rise was genuine, and consequently, she is entitled to claim LTCG on such a transaction.

Until and unless the initial burden cast upon the assessee is discharged, the onus does not shift to the revenue to prove otherwise.

The assessee has to establish that the rise of the price of shares within a short period was a genuine move that those penny stocks companies had creditworthiness and coupled with genuineness and identity.

The assessee cannot say that his claim has to be examined only based upon the documents produced by him, namely bank details, the purchase/sell documents, the details of the Demat Account, etc.

The assessee cannot say that he had blindly followed the advice of a third party and made the investment. The selection of shares to be purchased is a very complex issue. It requires personal knowledge and expertise as the investment is not in a mutual fund.

The assessees cannot take shelter under the opinion given by the experts as it is not the expert who has indulged in the transaction, but it is the assessee. Therefore by following such an expert’s advice, if the assessee gets into a “web” it is for him to extricate himself from the tangle, and he cannot reach out to the expert to bail him out.

Therefore, AO was well justified in concluding that the explanation offered by the assessee was not to their satisfaction. Thus, the assessee had not proved the genuineness of the claim and creditworthiness of the companies in which they had invested, AO rightly made the addition under section 68.